ENGAGING PRIVATE SECTOR INVESTMENT AT SCALE FOR CLIMATE CHANGE MITIGATION IN EMERGING ECONOMIES Insights from a GtripleC Project funded by the ASIAN DEVELOPMENT

ENGAGING PRIVATE SECTOR INVESTMENT AT SCALE FOR CLIMATE CHANGE MITIGATION

IN EMERGING ECONOMIES

Insights from a GtripleC Project fundedInsights from a GtripleC Project funded by the ASIAN DEVELOPMENT BANKby the ASIAN DEVELOPMENT BANK

and the UNITED NATIONS FOUNDATIONand the UNITED NATIONS FOUNDATION

Developed by Murray WardDeveloped by Murray Ward

GtripleCwww.GtripleC.co.nz

SHOW ME THE MONEYSHOW ME THE MONEY

SHOW ME THE MONEYSHOW ME THE MONEY

SHOW ME SOME LIGHTSHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY

SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SHOW ME SOME HEATSOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY

SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME

HEAT SHOW ME THE MONEY SHOW ME SOME COOLSHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME

SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVESSHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME

SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY

SHOW ME SOME GREENSHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME THE MONEY SHOW ME SOME LIGHT SHOW ME THE MONEY SHOW ME SOME HEAT SHOW ME THE MONEY SHOW ME SOME COOL SHOW ME THE MONEY SHOW ME SOME MOVES SHOW ME THE MONEY SHOW ME SOME GREEN SHOW ME

Framing the mitigation challengeOVER $4 TRILLION from 2010-2020 ....incl

2.2 trillion in zero and low carbon power generation2.2 trillion in zero and low carbon power generation

Over 2 trillion in energy efficiencyOver 2 trillion in energy efficiency

OVER $10 TRILLION from 2021-2030 ....incl

4.5 trillion in zero and low carbon power generation4.5 trillion in zero and low carbon power generation

Over 5.5 trillion in energy efficiencyOver 5.5 trillion in energy efficiency

AND THIS JUST IN THE ENERGY SECTOR

DOESN’T INCLUDE AGRICULTURE OR FORESTS

Trillions of dollars of investments

Source: IEA WEO2009

Total global investment for power generation in the 450 Scenario

Supply side and demand side

Source: IEA WEO2009

World energy-related CO2 emission savings by policy measure in the 450 Scenario

Incremental cf Reference

Framing the investment challenge

~$5 TRILLION by 2020 ....means

~ 2 trillion in equity finance~ 2 trillion in equity finance

~ 3 trillion in debt finance~ 3 trillion in debt finance

(using a conservative 60:40 debt:equity ratio) (using a conservative 60:40 debt:equity ratio)

Framing the investment challenge

~$5 TRILLION by 2020 ....means

~ 2 trillion in ~ 2 trillion in equity financeequity finance

~ 3 trillion in debt finance~ 3 trillion in debt finance

(using a conservative 60:40 debt:equity ratio) (using a conservative 60:40 debt:equity ratio)

Assets under management at end of 2008 by the global fund management industry

Trillions!

Finance and Investment “Ecosystem”

‘Small scale’ accumulators

‘Large’ Distributors

‘Large scale’ accumulators

Owners of accumulated wealth

End Users

‘Small’ distributors

Private Government

Pension Funds Risk Insurance sector

Cmrcl & Invstmnt Banks, other CFIs

Intnl Financial Instns (MDBs, other DFIs)

Governments

Funds (private and listed)

Debt Equity Hedge

Local Banks, other CFIs Sub-Fund managers

Technology Developers

Project Dvlprs Public

Project Dvlprs Private

Project Dvlprs P-P

Sovereign Funds

‘Balance sheets’ of private and listed

businesses

Wealth …and Funds Management

Fund of Funds

pension funds

endowments foundations

bank holding companies

high-net-worth individuals

insurance companies

investment banks

corporations sovereign wealth

funds other investors...

SOURCE (Investors)

Managed Fund 1

Managed Fund 2

Managed Fund ..n

DISTRIBUTION (Intermediaries)

USE

seed capital

venture capital

start-up

expansion

replacement capital

special situation

buyouts

Investment via managed funds

(private and listed)

Direct investments

Through the lens of investment

Climate Change Mitigation Policy

Hurdles for “green path” projects Compared with “brown path” projects providing the same

services

THINGS FAVOURING BAU:

Mature technology, achieved economies of scale

Installation scale System interconnections in place Past experience (so ‘cookie cutter’ savings) Risks well understood and managed Known and supporting regulatory

environment Subsidies endemic

THINGS DISFAVOURING ‘LOW C’ ALTERNATIVE:

New(ish) technology, yet to achieve potential economies of scale

Smaller scale installations System interconnections not in place Limited past experience (so system-wide

learning curve costs) Risks not understood, still to be managed Supportive regulatory environment yet to

be put in place Subsidies not yet in place (or contemplated)

Risk Clouds

Financing green (or brown) projects THINGS FAVOURING BAU:

As-built capital expenditure (capex) costs lower Interest on market equity and market debt

finance lower – because lower capex costs being financed and at lower interest rates because perceived risks lower

Cost of risk management financial instruments (for policy risk, currency exchange risk, other project risks) lower – because lower capex costs being financed and perceived risks lower

But cost of operation and maintenance higher

THINGS DISFAVOURING ‘LOW C’ ALTERNATIVE: OPPOSITE OF ALL THESE i.e. replace “lower” with “higher” (and one higher with lower)

Principal on Market Equity (ME)

Principal on Market Debt

Opprtnty cost of Sponsor Equity

Interest on market equity

Interest on market debt

Risk Mngmnt Instruments

Operation and Maintenance (O&M)

COSTS INCOME








COSTS

INCOME














COSTS INCOME








COSTS

INCOME














COSTS INCOME








COSTS

INCOME

Risk Clouds

Rolling away the Risk Clouds



Rolling over the Risk Clouds

Rolling over the Risk Clouds

Examples of new and innovative ideasUNEP FI

World Economic Forum

Meeting the Climate Challenge: Using Public Funds to Leverage Private Investment in Developing Countries

Nicholas Stern / LSE

Key messages from these “idea leaders”

We know where the money is, and is not. There is enough money to achieve the mitigation

task – in developed and developing countries. We just need to unlock it. The private sector can’t do this alone. It needs the

public sector to set the framework and play its role within this framework. This involves governments of both developed and developing countries.

KEY QUESTIONKEY QUESTION

Is it possible through smart and targeted public sector interventions (policies and finance mechanisms) to

sufficiently lower the risk environment of green investments in infrastructure

in developing countries to enable lower cost-of-capital finance from

institutional investors to be attracted...... at scale?































Why Institutional Investor Capital?Because here’s where trillions of $s are

BUT .... and it’s a big one! Most institutional investors are looking for

predictable rates of return, commensurate with energy infrastructure investing (particularly pension funds whose investment requirements are for long term investment horizons to match their long term predictable pension liabilities)

However, a gap exists between the risk/return expectations of such investors and the risk/return characteristics of clean energy and low carbon technology and infrastructure projects, especially in emerging developing country markets

Something of a “Catch 22”

Green investments in developing countries are too risky for institutional investors – so these trillions go elsewhere

Investors with higher risk appetite want correspondingly higher returns – so this cost of capital too high to bridge the “green gap”

Need a comprehensive ‘de-risking’ programme

“De-risk elements” .... a beginning menu

Host country policies that specifically and directly are supportive of investments in these sectors, including needed support for these to be implemented

Political and policy risk insurance Mechanisms to address foreign currency exchange

risk In-depth capacity building of relevant public and

private institutions and groups that are instrumental to the success, or otherwise, of investments in these sectors in these countries

Cost of capital and the ‘green gap’DEBT side

0

50000

100000

150000

200000

250000

300000

Principal Interest, 14%pa

Interest, 12%pa

Interest, 10%pa

Interest, 8%pa

Interest, 6%pa

Interest, 4%pa

Interest, 2%pa

Typical debt finance % in developing countries

Recent ‘coupon rates’ on Green Bonds

Institutional Investors and Green Finance Closing the risk spread

INSTITUTIONAL INVESTORS

Risk range across asset classes

DEBT(GreenBonds)

EQUITY




DEBT(GreenBonds)

EQUITY




DEBT(GreenBonds)

EQUITY

A two tier public-private fund for EQUITY

Top Fund Public (e.g. 20% - from Govts, MDBs) Private (e.g. 80% - from Institutional

Investors)

Top Fund seeds in-region managed funds that raise additional investors

and invest their funds in Projects and Programmes

e.g. 2.5 Bn

2.5 Bn

e.g. 7.5 Bn

P P P P P P P P P P P P e.g.

10 Bn

A two tier public-private fund for EQUITY

De-risk package‘wrapping’

Top Fund Public (e.g. 20% - from Govts, MDBs) Private (e.g. 80% - from Institutional

Investors)

Top Fund seeds in-region managed funds that raise additional investors

and invest their funds in Projects and Programmes

e.g. 2.5 Bn

2.5 Bn

e.g. 7.5 Bn

P P P P P P P P P P P P e.g.

10 Bn

10 billion EQUITY

10 billion EQUITY

15 - 20 billion DEBT

A question (or two) for today

Assume this model is successful ....and can flow tens of billions (and in time trillions) into mitigation projects and programmes in developing countries

How does this connect with the discussions on finance and funds and institutions currently occurring in the UNFCCC negotiations?

Should (and if so why and where?) public funds included in the “100 billion per annum from 2020” from developed countries be used for mitigation given the likely overwhelming needs for adaptation?

THANK YOU

Further information:Further information:

[email protected]@gtriplec.co.nz

www.GtripleC.co.nzwww.GtripleC.co.nz

GtripleC

Documents

ENGAGING PRIVATE SECTOR INVESTMENT AT SCALE FOR CLIMATE CHANGE MITIGATION IN EMERGING ECONOMIES Insights from a GtripleC Project funded by the ASIAN DEVELOPMENT